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A co-trustee’s responsibility

Guide Legal: If asked to serve as a co-trustee, be aware that acting as a rubber stamp will not protect you if things go wrong

When drafting a will, parents often name more than one of their children as the trustees of their estate. Given the dynamics between siblings, it is not uncommon for one child to take on a more active role than another in administering the estate.

However, in a recent decision, the Court of Appeal for Ontario has made clear that passive involvement as a trustee does not meet legal muster. Each estate trustee must take an active role in exercising his or her judgment and discretion on every matter relating to the administration of the estate.

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Last Will and Testament
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If a problem arises, a trustee will not be exonerated for passively acquiescing in a co-trustee’s decisions or actions.

The case arose from a will in which the testator, Thomas Cahill, appointed his daughter, Sheila, and his son, Kevin, as executors and trustees of his estate. They were directed to set aside $100,000 in a trust fund for the benefit of their brother, Patrick. The will specified that Kevin would be the trustee of Patrick’s trust fund with “sole discretion as to the investment of the monies” in the fund. Patrick was to receive a payment of $500 each month from the trust fund.

After Thomas died in 2010, Sheila and Kevin arranged for his house to be sold, with net proceeds to the estate of $223,013.75. Sheila and Kevin both signed a direction to the estate’s bank to issue a draft for $100,000 from the estate’s account, payable to London Life, with which Kevin opened an investment account. On the application form, Kevin described himself as the annuitant and Sheila as the contingent policy holder. Kevin did not mention a trust for the benefit of Patrick. He included the account information for Michael, another brother, under the heading “Information for Pre-Authorized Payment Agreement/Direct Deposit.”

In the years that followed, either Kevin or Michael would withdraw funds from the investment account and make the required $500 monthly payments to Patrick. This continued until the spring of 2014, when three consecutive monthly cheques were returned for insufficient funds. After this, the brothers made no further payments to Patrick.

Patrick later discovered that Kevin had borrowed the remaining money in the London Life plan as a “mortgage” for his business premises. When the business failed and the bank realized on the premises, there were no funds left to pay Patrick. Patrick then brought an application for payment of his entitlement under the will. He also sought to remove Sheila and Kevin as executors and trustees of the estate, and Kevin as trustee of his trust fund.

During the course of the litigation, Sheila’s lawyer wrote the following to Patrick: “Neither Sheila nor her children received the money from the house sale, Kevin did. I do not know what he did with that money. But one thing for sure is that Sheila and her two children do not know either. They are not liable to you in any way.”

The Court disagreed. It found that Sheila was negligent because she had abdicated her duties as executor and trustee of the estate. She was required to take “real, active steps to ensure that the trust fund was set up in accordance with the Will,” but she failed to do so. The Court stated: If the Deceased had merely wished Kevin alone to have absolute authority and to make all decisions with respect to the Estate, he would not have appointed Sheila as an executor and trustee. Sheila’s appointment in that role must be seen as reflective of the Deceased’s wish that she not simply acquiesce to or rubber stamp anything suggested or done by Kevin. Sheila was obligated to exercise her own judgment. She completely failed in that duty.

The Court held both Sheila and Kevin responsible for the outstanding principal necessary to fund the monthly $500 payments to Patrick.

Sheila appealed. The Court of Appeal dismissed the appeal. It confirmed that each trustee must take an active role in exercising their judgment and discretion on every matter relating to the estate. Sheila’s passivity did not protect her. As the Court put it, “doing nothing was not a luxury available to her as a co-trustee.”

This case is a good example of the common law obligations and duties that apply to trustees in all provinces. It has long been recognized, including by the Supreme Court of Canada, that the standard of care and diligence required of a trustee in administering a trust is that of a person of ordinary prudence managing his or her own affairs.

Co-trustees must recognize and understand that they are obliged to take an active role in fulfilling their duties as trustee. They cannot sit idly by as their co-trustee manages the estate. If they cannot or do not wish to participate in the administration of the estate, then they should renounce their appointment. Otherwise, they may be exposed to liability when something goes wrong. As Donovan W.M. Waters, a leading trusts scholar once wrote: “[A trustee] is not entitled to shrug off the wrongful actions of a co-trustee on the basis that he knew nothing of what the other was doing.”

Nadia Campion and Sarah Walker are business and estate litigators at Polley Faith LLP. Their clients include small- to medium-size businesses, individuals and associations across a wide range of sectors, including in the farming community. They can be reached at 416-365-0550 or [email protected] / [email protected].

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